Foiled by fuel.(Cover Story)

The world airline community has turned a corner, but it isn't the right corner. After three consecutive years of multibillion-dollar losses, including an ICAO-reported 2003 operating loss of $2.8 billion globally with an as-yet-unknown but likely higher net loss and ATA's report of a $3.6 billion net loss in the US alone, airlines counted on 2004 to provide better news.

After hammering away at costs since the near-simultaneous bursting of the yield bubble and 9/11, and waiting for the world economy to recover without any exotic new diseases, airlines had great hopes that the second half of 2003 would set the stage in 2004 for profits to return broadly, if not deeply, on the back of volume alone, with fingers crossed that a little yield recovery would sweeten the pot.

At year end that scenario looked promising, with one major caveat: The price of oil. The fuel price spike in February 2003 of $1.04 per gallon of jet fuel in ATW's spot cash market average was well understood to have been caused by tensions connected to the March US-led invasion of Iraq. When the initial conflict ended quickly with Iraqi oil fields intact, the price quickly dropped to $0.72 by May. However, continued troubles in Iraq, the desire of the OPEC oil cartel to restrain supply and a newly elevated level of demand from China and other developing economies started pushing the price upward in September. …

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